December 30, 1997
Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Filed via e-mail to rule-comments@sec.gov
Re: Amendments to Rules on Shareholder Proposals
File No. S7-25-97
Dear Mr. Katz:
This is in response to the Commission's request for comments on proposed
amendments to the rules related to shareholder proposals set forth in
Release No. 34-39093 (September 18, 1997). I've been having difficulty with
my internet service provider so I am sending this message again, in case my
prior message did not go through. My response is as an individual
shareholder concerned with the impact of corporate governance activities on
my investments, as well as on wider social issues. I believe a more
democratic form of corporate governance is critical to maintenance of a free
market system which operates both in the best interests of investors and
society-at-large.
I fully agree with the Commission's stated goals of making it "easier for
shareholders to include a broader range of proposals," while at the same
time providing "companies with clearer ground rules." However, the proposed
language would widely miss the mark and would lead to a further
retrenchment of management at the expense of shareholder activists. I hope
you will consider the amendments suggested below, particularly the deletion
of (c)(8) which precludes use of Rule 14a-8 provisions for nominating
directors.
This is the most fundamental reform needed since most typical
shareholder proposals on poison pills, staggered boards, etc. could be
eliminated if board members faced real contests and had to take a stand on
the issues. The current system of corporate governance is like having the
executive cabinet appoint our legislative representatives and relying on
the initiative process to pass any significant legislation. Imagine how
badly drafted our laws would be under such circumstances. Now imagine the
shareholer proposals twenty years from now if shareholders continue to be
locked out of the nominating process. What a mess it will be.
Personal Grievance (c)(4):
I agree with comments from CalPERS in this area. The motivation of the
proponent is completely irrelevant to the question of whether the company's
shareholders should have the right to consider and vote upon an issue that
is, on its face, unrelated to the "personal grievance." The amendments
should be revised so that only those proposals which, on their face, relate
to the redress of a personal claim or grievance are excludable; the
motivation of the proponent should not constitute grounds for exclusion. The
SEC should continue to enforce shareholder rights to access the proxy.
The Relevance Test (c)(5):
Again, I agree with the CalPERS comment in this area. The proposed
language should clarify that gross revenue or cost thresholds would only
apply if the proposal, on its face, concerns the purchase or sale of
services or products. Current language could be misinterpreted to exclude
many social and corporate governance issues.
Override (c)(5) and (c)(7):
The concept of an override mechanism is a step in the right direction.
However, the 3% threshold is too high. Even the largest institutional
investors, such as CalPERS, often only own about 0.5% of most large firms.
I recommend this provision be amended to lower the threshold to 1% for
large cap companies.
Reversal of Cracker Barrel (c)(7):
I agree with former Commissioner Wallman's remarks that Cracker Barrel
should be reversed immediately, regardless of other action taken. In
addition, I would delete that portion of the note to paragraph (i)(7) which
indicates the revised rule would exclude "the wages a company pays its
non-executive employees." Stockholders should not be barred from raising
issues regarding the impact of policies on pay related issues as well as
profit sharing, stock options and other incentives.
Relates to Election (c)(8)
This is the most serious flaw in the current regulations. This exclusion
should be eliminated; shareholders should not be prohibited from using Rule
14a-8 to nominate candidates for the board of directors. Imagine a
counterpart to this provision in the civil society; you can put an
initiative on the ballot but you can't nominate a candidate. It would be
absurd. The initiative process is used primarily when the candidates we
nominate and elect fail to act. We will continue to see more and more
issues raised by shareholders unless they believe directors actually
represent their interests.
Resubmission Thresholds (c)(12):
Delete this amendment. Far from expanding access to the shareholder
process, the study released by the Social Investment Forum Foundation (see
http://www.socialinvest.org/sec/analysis.htm) found the proposal to render
it almost meaningless. No fewer than 80 percent of all shareholder
resolutions would be ineligible for resubmission after the third year under
the proposed rules, compared to 21 percent under the status quo. The
proposed SEC rules would wipe out 70 percent of traditional corporate
governance resolutions. I haven't seen strong evidence that current
resubmission thresholds present an undue burden, in terms of expense, and
recommend they not be changed.
Eligibility 14a-8(a)(1)
I support increasing the market value eligibility threshold from $1,000 to
$2,000 and further would support an amendment to allow holders of 1% of the
outstanding voting shares to submit proposals under a provision which would
decrease the holding period required from 1 year to six months. These
provisions would discourage social activists from buying shares and using
them primarily as a social forum but would facilitate increased involvement
from shareholders with a significant financial interest in the firm.
Shareholder-Funded Proposals 14(a)(4):
I agree with the remarks made by CalPERS; this change should be rejected.
The right to vote uninstructed proxies against a proposal is an enormous
benefit for company management, and an enormous disadvantage for
shareholder proponents. Most companies have the ability to amend their
bylaws to require advance notice of matters to be presented from the floor,
should they believe this notice is truly necessary.
Review of Company Statements 14(a)(8)(e):
The SEC should continue its monitoring role. Although "only a handful of
shareholders make use of the mechanism each year," without the threat of
Commission review companies would have little incentive to negotiate.
Please contact me at the address below or call me at (916) 452-5338 if you
have any questions on the above comments. I would be happy to discuss my
comments in further detail.
Sincerely,
James McRitchie, Editor
Corporate Governance
2461 Second Avenue
Sacramento, CA 95818
URL: http://www.corpgov.net
e-mail: jm@corpgov.net